Fed up with short, punchy news titles such as ”Outsourcing is Dead”, or “My Delivery Manager Ate my Hamster“, designed purely to capture your attention with minimal substance?
Well, salvation can be found right here, as long-winded rambling ones are going to be all the rage this year, so here’s one to send you into a tail-spin: “Infosys will buy Capgemini, then IBM will acquire the newly-merged entity before spinning it out as part of a joint-venture with Deloitte, GE and Macdonalds”. Actually, before you hurry out to purchase some stock in the Golden Arches, I just made that up…
Instead, let’s talk about outsourcing vendors, and what on earth they are going to do when these tasty labor-arbitrage deals start to fizzle-out. As we discussed at length back in November, operational service provision is commoditizing and leveling the playing field. Customers did their planning during the recession, and, now armageddon has (apparently) been averted, it’s time to execute on that planning. And part of many customers’ planning right now, is to take advantage of moving operational support offshore and driving out some cost.
This is bonanza-time for the offshore-specialists that can deliver basic IT and BPO services at competitive prices. Contract-signings that were delayed during the painful recession months are now in full-swing, service vendors are reporting healthy results and even the sourcing advisors have stopped moaning about their lack of deals, and are making money again.
However – let’s not get too carried away. While the outsourcing market has rebounded, and it’s likely to remain strong for most of 2010 (read Part III when I get around to the next piece shortly), these labor-arbitrage deals are not infinite. Once customers have moved out as much of the easy work to service providers as they can, their focus will move to finding that next tranche of productivity, and it’s not going to be as simple as documenting standard processes and training an offshore team to replicate them. Customers may be delighted today that they trimmed 30% on this, and 50% on that, but next year those costs are eradicated and they won’t keep harking back to that successful outsourcing initiative they did back in ’09. They’ll be looking at what initiatives they can take advantage of next.
So when we spoke to 1055 customers, intermediaries and vendors across the global sourcing industry earlier this month, we drilled into the criteria behind vendor selection decisions, with an eye on how these decisions will be made in the future:
Figure 1: When evaluating vendors, financial stability and operational excellence are the table-stakes. Business transformation capabilities are the differentiators
Vendors need a proven delivery record and financial stability just to get to the table. The vast majority of buyers now see these as table-stakes just to start a discussion. The Satyam fiasco has left some sore memories with customers, who do not want to experience a repeat of their vendor going belly-up, like Satyam almost did. Would you sign up with an electricity provider who might go out of business? The same applies to whomever is processing your business transactions and managing your IT.
Moreover, with the industry for commodity work (i.e. technical support, application development, transactional accounting etc.) now quickly maturing, there’s little room for companies without proven customer successes and experience within the customer’s industry.
Once at the table, customers are asking “what else can you give me?” Quite simply, there are several vendors today pushing services within a similar price-band and sufficient track record of successful delivery. Furthermore, most large enterprises have already experienced offshoring and outsourcing varying degrees of their operations for several years’ now, and are smart enough to realize outsourcing provides an opportunity to deliver more than simply cost-savings (see Part I). Consequently, the ability to provide outcome-based pricing is now a critical component among a third of customers, and an important consideration for most of the rest.
Global presence and scale are less of an issue these days. Merely a couple of years’ ago, this would have been among the most critical selection criteria, however, today’s customers are less concerned with these issues, as most of today’s vendors are already expected to have a multi-shore strategy and sufficient ability to add resources when required. Moreover, most of today’s deals have an onshore / onsite component complemented with offshore support from India, Philippines or some other location. Everyone has that in spades. It’s like asking whether your electricity provider has enough generators…
Innovation / transformation now becoming major decision-swayers. While on the surface, it may appear that transformation and innovation are only secondary considerations (i.e. not a “deal-breaker” for three-quarters of customers), when you take into account that most vendors are offering similar solutions at similar prices, it is these categories that are fast-becoming the decision-swayers.
Brand not nearly as much of a consideration. I do view this skeptically, as people rarely admit they are swayed by brand, however, the fact that it is the least important selection criteria does tell you that service delivery these days is much more about the realities of delivery excellence, than the label they under which they are delivered. Engaging with a second-tier offshore brand is now seen as acceptable as a household Western brand. Moreover, executives these days can get fired for using a big brand and messing up. The sheer number of customers that have engaged the new breed of offshore service providers, in recent years, has significantly leveled the playing field when it comes to brand.
The bottom-line: those that fail to invest in the future delivery model will likely get cast aside. To conclude, it’s clear this business has reached a critical juncture where providers are being judged on their ability to go beyond standard services and deliver real business value for their clients. Decisions are made on which vendors have invested in creative staff with industry domain skills, backed up by the table-stakes of delivering bread-and-butter services at competitive prices.
Everyone’s talking a big game right now, and it may get them to the table… it may even win them new business, but their real challenge is whether they can truly move clients up the value chain and help them find new avenues for productivity and growth. While a lot of basic services contracts are being divvied out in this post-recessionary era, if today’s winners fail to invest in upping the value of their service provision, they may find these clients seeking alternative service partners before long. Some vendors will always be happy delivering low-end services, however, if they see their business going to competitors with higher-value propositions, they will desperately seek out ways to remain competitive. The question is whether they have the appetite and culture to invest to find that next level of performance for their customers.